SEC Advisory Committee on Market Information
March 1, 2001 Meeting
The Advisory Committee on Market Information ("Committee") held its third meeting on March 1, 2001. Dean Joel Seligman, Chairman of the Committee ("Chairman"), began the meeting by discussing several administrative matters, including the dates for the next meeting of the Committee and the Subcommittee on Alternative Models ("Subcommittee"), as well as the use of a round-robin process for drafting the Committee's report to the SEC.
Professor Donald Langevoort, Chairman of the Subcommittee, briefly discussed how the Subcommittee would proceed. Prof. Langevoort noted that the goal of the Subcommittee would be to create a basic decision structure with respect to the alternative market data models, and present it to the full Committee in advance of the May 14 meeting. The Subcommittee would focus on the key issues relating to the design of a new model, as well as the risks, costs, and benefits associated therewith.
The Chairman then asked Annette L. Nazareth, Director of the SEC's Division of Market Regulation, to discuss the amicus submission by the SEC in an arbitration proceeding involving certain OPRA Plan participants and Reuters. Ms. Nazareth briefly described the nature of the arbitration proceeding and the substance of the SEC's amicus submission. Ms. Nazareth noted that the submission articulates the SEC's view of the current regulatory model, and should not be interpreted as preempting the work of the Committee.
The Chairman then began to work through the agenda for the meeting, which focuses on ways to improve the current market data model. Turning to the first issue on the agenda, Market Information that Vendors and Broker-Dealers Should Be Required to Provide to Customers, the Chairman asked each of the members whether the Committee should recommend: (1) retaining the current Display Rule requirements; (2) increasing or reducing the minimum level of information that must be provided to customers under the Display Rule; or (3) eliminating the Display Rule. The vast majority of members favored retaining some mandatory minimum level of consolidated data, with a rough split between the current Display Rule requirements and increasing the Display Rule's requirements. Only two members clearly supported the elimination of the Display Rule. A third would permit unconsolidated data to be displayed so long as there is adequate disclosure of this.
To explore this issue in more depth, the Chairman asked those members who recommended retaining the current Display Rule requirements to explain why they do not believe deeper information should be mandated. These members believed that competition, rather than regulation, should govern the provision of information beyond that required by the Display Rule. Mandating a rigid set of deeper information could stifle innovation, increase costs, and create capacity concerns, and would ignore the differing information needs of market participants. Some also suggested that more time was needed to assess the impact of decimalization.
The Chairman then asked those members advocating an expansion of the Display Rule requirements for additional guidance on what specific additional information should be required. Robert Colby of the SEC suggested that members clarify whether they were advocating a "push" system (where the deeper information would have to be given to users) or a "pull" system (where the deeper information need only be made available to users). Specific suggestions for deeper information included: (1) three to five quote levels below the NBBO; (2) an aggregation of orders at the 10,000 and 25,000 share level; (3) the high, low, and average price of the last five minutes, as well as the high and low price of the day; and (4) the full limit order book. The members were divided, however, on whether the deeper information should be available on a push or pull basis.
Turning to the second issue on the agenda, How Market Information Should Be Consolidated, the Chairman asked whether the current model should be retained, with SIAC and Nasdaq as the exclusive consolidators, or whether the exclusive consolidation function should be subject to active competitive bidding at the end of each contract term. A substantial majority of the members who expressed an opinion favored competitive bidding for the exclusive consolidator.
The Chairman then asked whether the joint SRO plans should be dissolved, allowing each SRO to file a separate transaction reporting plan, but with the understanding that an exclusive consolidator would be retained. This discussion raised more questions than answers. Several members noted that the real issue here is appropriate oversight of price setting by the individual SROs. If a minimum level of consolidated information is required, and the joint SRO plans are dissolved allowing each SRO to separately negotiate the price of its data, there may be a need for some check on the ability of the individual SROs to extract monopoly rents.
After the lunch break, the Chairman focused on whether entities other than, or in addition to, the SROs (e.g., market makers and ECNs) should provide market information to the exclusive consolidator. A large majority of those who expressed an opinion believed direct reporting to the exclusive SIP should be limited to SROs. SROs play an important role in assuring market integrity, which could be undermined if entities other than SROs were to submit data directly to the consolidator. A few members would permit non-SROs to report directly to the exclusive SIP.
Concluding the questions raised by the second agenda item, the Chairman asked whether SROs should be permitted to provide their market data separately to other disseminators in addition to providing it to the exclusive SIP. A large majority of members believed SROs should be allowed to make their data separately available, so long as all are providing the mandatory minimum level of data to the exclusive SIP for consolidation. A few members opposed this idea, primarily on the grounds that it might undermine the pricing of the consolidated data by the exclusive SIP. The Chairman also asked whether the SROs should be permitted to provide data beyond the mandatory minimum on a competitive basis, largely free from regulation. All members agreed that this should be the case.
The Chairman next moved to the third item on the agenda, Governance of the Consolidators, and asked about the appropriate composition of the body governing the joint SRO plans. Specifically, he asked whether: (1) the existing composition of the Operating Committees should be retained; (2) the Operating Committees should be broadened to include voting representatives of other constituencies (e.g., vendors, broker-dealers, and public investors); or (3) there should be broader participation, but through a non-voting advisory committee to each of the Operating Committees. A majority of those who expressed an opinion favored the third option - permitting broader participation in the governance process, but through a non-voting advisory committee. A small number supported each of the first and second options. A few members did not express an opinion, and suggested that the focus should be on the governance of the Plan administrators, not the processors, since most decisions of substance are made by the administrators.
Turning to the voting provisions of the joint SRO plans, the Chairman asked for clarification of how they worked in practice. The current rules are one SRO-one vote and, in general, a majority vote for actions in accordance with the existing Plans and unanimity for plan amendments, including fee changes. The Chairman then asked whether the status quo should be maintained, or whether the voting provisions should be modified (and if so, how). Several members did not believe they were qualified to express a view on this issue. The vast majority of those expressing an opinion favored retaining the one SRO-one vote rule. A small number thought the notion of voting weighted by market share might be worth exploring. As to voting requirements, many felt there were problems with the unanimity requirement, but there was no consensus on alternatives.
The Chairman then began a discussion of the fourth agenda item - How User Fees are Determined and Revenues Allocated Among Plan Participants. He asked the members whether SEC oversight of market data fees should remain as it is today - general oversight based on the Section 11A statutory "fair and reasonable" and "not unreasonably discriminatory" standards - or whether a more precise standard, such as the cost-based standard outlined in the SEC's December 1999 Concept Release, should be used. While some members were intrigued by a cost-based approach to market data fees, almost all believed such a standard would be difficult to implement in practice. There was unanimity that, to the extent a cost-based approach led to something akin to SEC ratemaking, that would be a bad thing. Some members felt additional information on how market data fees currently are determined would aid the discussion (e.g., how market data is priced, how fees are allocated among different participants, the extent to which fee arrangements vary among similarly-situated users, whether any pilot programs currently are in use). Several thought that adding more transparency, or "sunshine," to the price-setting process might resolve many of the present concerns about market data pricing.
The Chairman concluded the meeting by describing the work plan for the next Committee meeting. At the April 12 meeting, the Committee will continue to work through the agenda prepared for the March 1 meeting, and will complete its discussion of ways to improve the current market data model. The April 12 meeting will focus on the most significant remaining issue - market data fees. Major aspects of this discussion will be whether there should be more "sunshine" by the Plan administrators and SROs on issues of market data costs and administration, and how concerns about non-discrimination might be satisfied. The remainder of the April 12 meeting will be devoted to the Ancillary Matters described in the fifth agenda item, as well as to any other unresolved issues that might productively be revisited. The Chairman asked that various papers be prepared for, and presentations be made at, the next meeting, as background for this discussion.
A full transcript of the meeting is attached to this summary. Approximately 21 members of the public attended the meeting. The submissions made by each of the NYSE, Schwab, Nasdaq, Amex, the Chicago Stock Exchange, Datek, Archipelago and Reuters in connection with the March 1 meeting also are attached.